You are here

Indonesia launches master plan to breathe new life into Islamic finance sector

Fri, Aug 19, 2016 - 11:30 AM

The Indonesian government has launched a national master plan to develop its Islamic finance industry, the latest effort aimed at awakening what is still a niche sector in the world's most populous Muslim country.

PHOTO: BLOOMBERG

[JAKARTA] The Indonesian government has launched a national master plan to develop its Islamic finance industry, the latest effort aimed at awakening what is still a niche sector in the world's most populous Muslim country.

Islamic finance was introduced in Southeast Asia's largest economy more than two decades ago but it has managed only modest gains in the country of 250 million, despite multiple regulatory efforts and grassroots initiatives.

Indonesian Islamic banks hold roughly 5 per cent of total banking assets, compared with more than 20 per cent in neighbouring Malaysia and about a third of total banking assets in several Gulf countries.

The government aims to drive its planned breakthrough via a range of initiatives, from mobilising Islamic charitable funds to modernising investments made by Indonesia's pilgrims' fund.

Market voices on:

"This could finally awaken Islamic finance in Indonesia to allow the country to claim its true potential," said Farrukh Raza, managing director of IFAAS, an Islamic finance consultancy which designed the 10-year master plan. "We found that government efforts are very comprehensive but also very scattered. Regulations are there but there is no coordination, promotion is fragmented and those expenses are not always bearing fruit."

The initiatives include a government policy to increase use of Islamic bonds, or sukuk, by issuing debt instruments related to infrastructure development, agriculture and education.

Under the policy, the government would increase its use of Islamic debt instruments to as much as 50 per cent of total issuance in 10 years time, Mr Farrukh said.

Currently, Islamic instruments represent around 13 per cent of total outstanding government debt, according to Thomson Reuters data.

Indonesia's pilgrims' fund would also see the establishment of a dedicated asset management arm to implement a more rigorous investment policy and attract external fund managers.

The fund receives an estimated US$800 million every year from Indonesians wishing to make the Hajj pilgrimage to Saudi Arabia, with new applicants facing a quota backlog of around 15 years, Mr Farrukh said. "The industry is overconcentrated in retail but there is little in terms of wholesale banking. That is one of the big show-stoppers," he said.

The establishment of a national coordination committee, possibly chaired by Indonesia's President Jokowi, Raza said, would help ensure implementation of longer-term objectives, potentially seeing Islamic finance take as much as a 20 per cent share of the financial sector in 10 years time.

An additional layer of more complex measures, such as the merger of several state-owned Islamic banks, could help raise that figure to 30 per cent, Mr Farrukh added.